Identifying 10 Potential Reasons for Transportation and Quality Problems
The First Step Towards Transportation Process Improvement Opportunities
Many companies are experiencing dramatic increases in transportation cost that have turned into cash and quality drains for their organization. Some have taken steps to address their transportation costs. Savvy financial managers know a transportation cost can take 5 to 10 percent of gross revenue and will go up if not managed effectively. In addition, companies are being required to find ways to improve the quality of delivery services in order to hold off competitors. (For example, a $60 million food manufacturer saved 12 percent of their transportation cost and improved delivery performance by following the guidelines set out below.) Both transportation cost and quality enhancements result from focused process improvement tactics. If you are interested in process improvement opportunities to solve these transportation cost and quality problems and associated issues, you must first understand them.
Ten Potential Reasons for Your Transportation Cost and Quality Problems
1. Fuel Surcharges continue to fluctuate due to current economic conditions. Although today diesel prices are down, just within the past year we have seen them hit almost $5.00 per gallon. Carriers address this through fuel surcharges, but it is difficult for transportation managers to know if fuel surcharges are fair or excessive. It is very important to manage this process. Do you know how your carrier assesses its fuel surcharge, or how it is calculated? Do you know their multiplier, or if they use DOE guidelines? Is your carrier using the fuel surcharge to compensate for low freight rates?
2. Freight Rates are a direct line item cost and many companies have experienced freight rate increases in addition to fuel surcharges. Despite current economic conditions, carriers attempt to increase freight rates. Could your carriers be using the price of oil to justify increases or using their fuel surcharge to offset their inability to get increases?
Have both LTL and TL rates increased? Did the carrier implement the increase or negotiate the increase?
3. Assessorial Charges often increase transportation cost without actually increasing a freight rate. Do you know what the carrier is charging for added services? Do you know what the services are? Do they give you advanced notice?
4. Supplier Shipping Terms are often under scrutinized because of the potential conflict with the buyer, purchasing department or vendor. Freight terms are negotiable. What freight terms have been agreed to? Is your supplier taking advantage of your freight volume for better rates? Are they being passed along to you? Are your suppliers making a profit on your freight by adding a fee?
5. Shipment Distribution is another problematic area when companies add products to their services and do not review its impact on shipments leaving their facilities. Shipment size, traffic lanes, total shipment configuration, density and cubic volume dynamically change the cost structure and require review for trends that can/do impact pricing.
6. How do you treat your transportation partner? Do you help each other control transportation cost or simply offer them the opportunity to haul freight? What are the payment terms? Are they adhered too? Are they reviewed regularly?
How do you tender loads to your carrier (EDI, phone or fax)? Do you give them enough notice? Do you need to improve the process?
7. What is your internal shipment escalation process? Are all customers treated the same? Under what conditions and who authorizes airfreight? Does the authorizing party have accountability for transportation cost?
8. Carrier load acceptance is also critical to transportation cost management. If carriers are turning loads down, late making pick-ups or late with delivery, you could be spending cash to correct. Have you documented your logistics process?
9. Have rail conditions or consolidations impacted you? Have you considered using rail to manage transportation cost? Has rail failed you? Do you know how to use rail effectively?
10. If you are international shipper you are certainly affected by port capacity and conditions. Work stoppages at a port or internal changes such as at the LA ports are costly. What about security?Are you impacted by new Homeland Security regulations? Finally, do you have signed carrier agreement (contract) in place to protect your rates and service? You need to improve your logistics process management.
Any of the issues referenced above impact transportation cost, but issues 3 through 10 also impact the quality of the service you are being provided. Even as you monitor freight rates and fuel surcharges, failure to monitor all aspects of the transportation solution can lead to lost customers. The entire quality process must be considered.
Although there has not been time and room in this article to discuss all transportation considerations, quality and cash drains, I will provide a few for your reference. They are: Sarbanes-Oxley, claims, dock congestion, order flow, customer requirements, service policies, company strategic imperatives, escalation, customer prioritization, inventory stocking policies, inventory deployment strategies, inter-company transfers, substitutions, obsolescence policies, technology capabilities and finally external and internal communications with transportation carriers. An organized logistics division must embrace process improvement.
In Conclusion of Acknowledging Transportation Cost and Quality Drains
Many companies have considerable exposure regarding transportation in quality, cost, profit and customer retention. Typically, they have difficulty addressing these challenges due to service distractions fighting fires and lack the time, resources or expertise. It is important to know there are organizations that have the expertise to identify potential solutions to these transportation cost and quality problems, and you may be surprised at the small relative size of the cost for these services in proportion to the transportation cost reductions and benefits that can be gained. In any case, I am reminded of Nike's marketing mantra: "Just do it!" You'll be glad you did.